Point and Figure Charts

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Point and figure charts display predetermined price changes, which
indicate the overall direction of prices. Point and figure charts,
which differ from bar charts in a number of ways, record only significant
changes in the stock price. Significant is defined by the analyst
drawing up the chart. For higher-priced stocks (more than $50,
for example), a 2-point difference might activate the recording of the
price (see Figure 11–3). For lower-priced stocks, the difference might
be 1 point. The second major difference between point and figure
charts and other charts is that neither time nor trading volume is
important. This type of chart is used to draw attention to emerging
price patterns.

The first step in the construction of a point and figure chart is
to determine the price movements you consider to be significant.
For a high-priced stock in the hundreds of dollars, 3 to 5 points may
be appropriate, whereas a stock in the $10 price range might have a
0.5 to 1 point differential. Assuming that the analyst has decided on
2 points for a stock in the $50 price range, the changes in price are
plotted according to these guidelines:
* An X is inserted on the chart when the price of the stock
advances by at least 2 points.
* An O is inserted when the stock declines by at least 2 points.
For example, the following prices result in the point and figure
chart shown in Figure 11-3:

Figure 11-3
Point and Figure Chart

To begin drawing this chart, the first X at $50 is plotted. The
next two entries in the first week (51 and 511⁄2) are ignored because
they are less than the $2 stock price differential. The second X is
placed at $52 to show the increase in the stock price to $521⁄4,
whereas the next day’s stock price of $523⁄4 is ignored.

In the second week, the stock price falls to $50, which necessitates
putting the letter O (to signify a price decline) next to $50 in the
second column. A second O is inserted at $48 to show the greaterthan-
2-point decline to $473⁄4, followed by a third O when the price
falls to $46 per share. The third column shows the price increases to
$48, $50, and higher than $52. Each time the stock advances by $2, an
X is inserted, and when the stock price falls by $2, an O is inserted.
Thus a point and figure chart shows, at a glance, price changes.
Stock prices beyond the third week are plotted, and a downward
trend line emerges. Technical analysts would view the penetration
(the upward crossing) of the downward trend line as a buy signal.